The U.S. Court of Appeals for the Ninth Circuit recently reversed an award of summary judgment in favor of a mortgage loan servicer, holding that the evidence could support a verdict that the servicer engaged in an unfair business practice by accepting trial modification plan payments when it had previously determined the borrower was not eligible for a loan modification.

A copy of the opinion Oskoui v. J.P. Morgan Chase Bank, N.A. is available at: Link to Opinion.

A borrower defaulted on her mortgage loan, and later applied for a loan modification. The mortgage loan servicer sent her a letter offering her a “Trial Plan Agreement.” The letter specifically stated, “If you comply with all the terms of this Agreement, we’ll consider a permanent workout solution for your loan once the Trial Plan has been completed.” The Agreement required the borrower to remit three equal payments of $3,280.05. The borrower signed the Agreement and timely sent the payments.

Later, the servicer informed the borrower that she did not qualify “at this time” for a modification under either the federal Making Home Affordable Program (HAMP) or under the servicer’s in-house modification program because her “income [was] insufficient for the amount of credit [she] requested.” The letter also stated that “we may be able to offer other alternatives to help avoid the negative impact” of foreclosure.

The servicer did not provide additional reasons for its denial. However, the servicer had also denied the borrower for a modification because: 1) the unpaid principal balance on the loan was higher than the amount allowed under the HAMP Guidelines and 2) the loan failed to satisfy the servicer’s net present value (“NPV”) test. The servicer’s NPV test compared the NPV expected from a modification to the NPV of the unmodified loan. If the cash flow from a viable modification exceeds that of a non-modified loan, HAMP requires a servicer to offer a modification to a borrower. If the NPV test generates a negative result, modification is optional.

The borrower then submitted a second application for a loan modification.

In response to the second application, the servicer sent a letter stating that it “want[ed] to help [the borrower] stay in [her] home” and confirmed receipt and review of the borrower’s “verification of income documentation.” The servicer also provided three payment coupons in the amount of $2,988.49 with payment deadlines notated and stated: “After successful completion of the Trial Period Plan, [we] will send you a Modification Agreement for your signature which will modify the Loan as necessary to reflect this new payment amount.”

Later, the servicer sent the borrower another letter informing the borrower that she was not eligible for a federal HAMP modification “because the current unpaid principal balance on [her] loan [was] higher than the program limit.” This letter also stated that the servicer was “happy” to tell the borrower that she “‘may be eligible for other modification programs’ and that [the servicer] may be able to offer ‘other alternatives’ to stave off the negative impact a possible foreclosure may have on [her] credit rating, the risk of a deficiency judgment … and the possible adverse tax effects of a foreclosure.”

The borrower made all payments called for by the first letter and continued making such payments for a total of seven months.

The borrower was served with a foreclosure notice listing a foreclosure sale date. Prior to the sale date, the servicer sent the borrower another letter encouraging her to continue to seek a modification. The servicer told the borrower that she might “qualify for monetary incentives that will be used to pay down the principal balance of your loan if you make your modified payments on time.”

Several months later, the servicer sent the borrower a letter denying her application, stating: “We are unable to offer you a modification through the Home Affordable Modification Program (HAMP) or any [of the servicer’s] modification programs … because you did not provide us with the documents we requested.”

The borrower then filed an action for breach of contract, breach of the implied covenant of good faith and fair dealing, violation of California’s Unfair Competition Law (UCL), and violation of the federal Truth in Lending Act (TILA).

The servicer moved to dismiss the borrower’s complaint. The trial court dismissed the borrower’s TILA claim but denied the servicer’s motion with respect to the borrower’s remaining claims. The trial court reasoned, “If what [the borrower] alleges is true – that [the servicer’s] left hand sought payments from Plaintiff pursuant to a plan designed to give her an opportunity to modify her loan while, notwithstanding [the borrower’s] payment in accordance with that plan, [the servicer’s] right hand continued all along with foreclosure proceedings and both hands should have known from the start that [the borrower’s] loan would not be eligible for modification in any event – the Court can conceive of such allegations stating a [UCL] claim.”

Later, the servicer brought a motion for summary judgment. The trial court granted the servicer’s motion on the ground that the borrower had failed to provide the servicer with the “requested documentation to support her loan modification request.” The trial court also rejected the borrower’s breach of contract claims because the borrower had only “conclusorily” asserted that the “modification back-and-forth ripened into a contract with [the servicer]” and remarked that the borrower had not included a breach of contract claim in her first amended complaint.

The borrower appealed. On appeal, the Ninth Circuit reversed the trial court’s order granting summary judgment on the borrower’s breach of contract claim.

The Ninth Circuit held that the trial court “erred in failing to acknowledge [the borrower’s] claim for breach of contract in her pro se complaint.” The Ninth Circuit noted that the borrower “explicitly styled her complaint on its first page as one for ‘BREACH OF CONTRACT AND BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALINGS.’” The Ninth Circuit also found that “[o]nce [the borrower] made her three payments, [the servicer] was obligated by the explicit language of its offer to send her an Agreement for her signature ‘which will modify the loan as necessary to reflect this new payment amount.’ [The Servicer] did not call it either a HAMP agreement or [an in-house] agreement, just an ‘Agreement.’ What program the Agreement was part of is irrelevant.”

The Ninth Circuit also reversed the District Court’s order granting summary judgment on the borrower’s UCL claim. The Ninth Circuit noted that the borrower was indeed ineligible for a HAMP modification, but that “instead of determining eligibility before asking for money – a logical protocol called for by HAMP as of January 28, 2010 – [the servicer] asked [the borrower] for more payments.”

The Ninth Circuit held that “[t]he facts in this record would amply support a verdict on this claim in [the borrower’s] favor on the ground that she was the victim of an unconscionable process.” The Ninth Circuit reasoned that “[w]ith its March 1, 2010 letter, [the servicer] deceptively enticed and invited [the borrower] into a process with the demonstrably false promise that a loan modification was within her reach if she were to make three monthly payments of $2,988.49 each. The next day – and for the first time – [the servicer] eliminated a HAMP modification from its menu, but neither advised [the borrower] what [its in-house modification guidelines] required nor suspended additional payments until it could determine her [in-house modification] eligibility.”

Finally, the Ninth Circuit reversed the trial court’s dismissal of the borrower’s TILA claim. The Ninth Circuit cited the Supreme Court of the United States’ ruling in Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015), which held that TILA’s right to cancel may be exercised by a written notice from the borrower to the lender within three years after the consummation of the transaction, without need to also file a lawsuit within the three-year period.

The Ninth Circuit observed that the Supreme Court decided Jesinoski after the trial court had dismissed the borrower’s TILA claim. As a result, the Ninth Circuit remanded the action to the trial court “with instructions to permit [the borrower] to amend her complaint to allege a right to rescind pursuant to Jesinoski.”